The federal government is providing two forms of disaster relief loan programs to small business owners who are facing significant hardship during the coronavirus (COVID-19) pandemic. A small business is not eligible for both programs, so you will need to determine which loan program best meets your needs.
Economic Injury Disaster Loan (EIDL) Program
The Small Business Administration (SBA) is providing direct, low-interest federal disaster working capital loans to businesses facing revenue loss in designated states, including Texas. There is no need to go through a lending institution to receive the loan, and eligible businesses can receive the loan as long as negative consequences of the disaster are experienced.
Details of the SBA loan are as follows:
- SBA Economic Injury Disaster Loans (EIDLs) are limited to working capital for small businesses and private nonprofit organizations that have been directly affected by COVID-19.
- Loans of up to $2 million can be used for payroll, to pay fixed debts, accounts payable and other bills that could have been paid prior to the crisis.
- The interest rate is 3.75% (2.75% for nonprofits).
- Loans exceeding $25,000 may require collateral; loan terms are up to 30 years and payments may be deferred for four months.
- The loans may not be used to replace lost sales or profits, and they may not be used to expand.
- Applicants must have good credit history along with the ability to repay the loan.
- The business must be physically located in the disaster areas—economic nexus does not make a business eligible.
- EIDL loans are only for businesses that do not have other available credit, such as existing lines of credit.
- Examples of eligible businesses include restaurants, retailers, hotels recreational facilities and manufacturers, among others.
- Casinos, agricultural businesses and religious and charitable organizations are ineligible.
- Applications can be made online or by mail; see federal SBA disaster relief site for more information.
Eligibility for the EIDL loans vary by state—check Texas Disaster Resistance Guidelines.
Related Recorded Webinar: A Business Owner’s Guide: Overview of Federal & State Stimulus Aid Programs
Payment Protections Loans for Small Businesses
As part of the historic $2 trillion CARES Act stimulus relief signed into law on March 27, 2020, the $350 billion Emergency Coronavirus Relief provisions provide funds for payroll, payroll taxes, employer health insurance, pension benefits, mortgage payments, rent, and utilities. The payment protection loans are for businesses with up to 500 employees. The covered loan period is February 15 through June 30, 2020.
Details of the loan include:
- Increases maximum loan to $2 million through December 31, 2020.
- Increases loan guarantees by the federal government to 100% through December 31, 2020 (after that date 85% guarantee for loans greater than $150,000).
- The maximum amount for the 7(a) loan is 2.5 times the average total monthly payroll costs, or up to $10 million for the first year ending on the date the loan was made.
- Waives standard borrower and lender fees for 7(a) loans; no personal guarantee is required.
- Possible deferment of repayment of the loans is for a period of at least six months, not to exceed a year.
- Maturity is a maximum of 10 years, with the interest rate not to exceed 4%.
- Under Section 1112 of the Act, the government will pay the principal and interest on a paycheck protection loan for the first six months for which payments are due.
- The loan is routed through 7(a) lenders without going through SBA channels.
- Borrowers must be in business by February 15, 2020 and have employees with payroll.
The portion of the the loan that is used to pay payroll, rent, and utilities for the 8 weeks from the grant of the loan, may be forgiven without tax consequences provided that employment continues through June 30, 2020.
Please note, the Employee Retention Credits included in the CARES Act are not available if a business takes out this loan. For more information on payment protection loans and other provisions of the federal stimulus package, see our CARES Act summary.
Other Considerations for Small Businesses
Small business owners may also want to consider business interruption insurance, though some policies exclude interruptions for viruses. You will need to check your policy for exclusions. Most lenders are being flexible during this time of uncertainty—check with your lender about other options, such as interest only payments, fee suspension and payment deferment.
COVID-19 Resources and Planning Services
Need timely updates and helpful links to COVID-10 disaster relief programs? Visit GPP’s COVID-19 Business Assistance and Resource Center. To learn the best path forward for your business during this challenging time, our COVID-19 Business Advisory and Planning Services Group is ready to assist.
For immediate questions, email CARETEAM@GPPcpa.com
Note: This content is accurate as of the date published above and is subject to change, as definitions change. Please seek professional advice before acting on any matter contained in this article.